Fidelity Spurns Japan Utilities as Goldman Says ‘Buy’
“There’s no reason to invest in the utilities if the nuclear plants stay offline and dividends don’t come back,” Masahiro Fukuda, a Tokyo-based director at Fidelity Investment Japan, whose parent manages $1.6 trillion globally, said in a phone interview Nov. 15. “Public opposition means it’s unlikely that the reactors will be allowed to restart.”
The Topix Electric Power & Gas Index (TPELEC) slid 14 percent from the start of July through Nov. 16 as fund managers abandoned hope Japan’s atomic power industry would recover from the worst nuclear disaster in 25 years. A measure of price swings on the gauge has doubled in the period, data compiled by Bloomberg show. Utilities could have a “huge” rebound if electricity prices are allowed to rise, according to Goldman Sachs Group Inc. analyst Hiroyuki Sakaida, who rates the sector attractive.
Shares of Hokuriku Electric Power Co. (9505) and Kansai Electric Power Co. have each dropped 40 percent this year amid investigations into seismic faults near their power plants. Prime Minister Yoshihiko Noda in September set a goal of phasing out nuclear power by 2040. The utilities reported combined losses of $8.2 billion for the six months through September, and six of the country’s 10 power producers skipped dividends for the first time in decades.
On March 10, 2011, the day before a tsunami triggered meltdowns at Tokyo Electric Power Co.’s Fukushima Dai-ichi plant, the 30-day historical implied volatility reading for the utilities gauge was 9.4, according to data compiled by Bloomberg. That reading was 39.2 at the end of last week, more than twice that for the Topix Index, Japan’s broadest equity- price measure.
The index of power producers rose or fell more than 2 percent on 11 of the 30 trading days through Nov. 16. It gained 4 percent as of the 3 p.m. close today, taking a three-day advance to 9.8 percent.
“Investors need to adjust their mindsets about whether or not the utilities are still a defensive sector,” Chin-Ping Chia, head of research at MSCI Inc. in Hong Kong said. MSCI includes the Japanese utilities in indexes it compiles. “The volatility is staggering.”
Goldman Sachs analyst Sakaida rates the sector “attractive,” citing prospects the government will allow higher electricity rates to cover the costs of using natural gas to generate power.
“It’s all about whether or not you’re trying to profit from dramatic price swings,” Sakaida, who has a buy rating on Kansai Electric, said in a phone interview. The sector may have bottomed in September when a government policy paper on energy strategy seemed to back away from a goal of phasing out atomic power, he said in a report dated Nov. 16.
The utilities index gained 5.6 percent in the two trading days through Nov. 16 after the ruling Democratic Party of Japan said it would call national elections. Polls show the opposition Liberal Democratic Party, which promoted Japan’s atomic industry during most of its five decades in power, will win.
Individual investors are also betting on price swings. The number of Kansai Electric shares held in margin accounts surged to a record 12.3 million on Sept. 21 from an average of about 900,000 before the Fukushima accident, according to weekly stock exchange data compiled by Bloomberg going back to 1991.
Fidelity is only buying and selling the utilities’ shares for funds that track indexes in which the power producers are included, Fukuda said. The Japan Dividend Growth Stock Fund sold its entire holdings of Kansai and Chugoku Electric Power Co. in the six months through July 10, according to Fidelity’s published reports. By Oct. 19, the fund had gotten rid of remaining holdings in Hokkaido Electric Power Co. and Shikoku Electric Power Co., the reports show.
Daiwa Securities Group Inc.’s Japan High Dividend Stock also sold its stake in Kansai Electric in the six months through mid-July, according to the company’s data. Toshiaki Sasaki, a Tokyo-based spokesperson for Daiwa, declined to comment on whether other funds managed by the company continue to hold utility shares.
“At this point, long-term fund managers will have a difficult time explaining to clients why they would invest in these names,” said Yuuki Sakurai, president of Fukoku Capital Management Inc. in Tokyo, which oversees 1.5 trillion yen. “The future of the industry is totally unclear. It’s become wrapped up in politics.”
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